Superannuation is a great tax-effective long term savings strategy, but as Centuria’s Neil Rogan explains, other strategies may be needed to plug the retirement savings gap.
We know that as a population Australians are getting older and living longer. What is surprising however, is that according to the Australian Bureau of Statistics (ABS) the greatest gains in life expectancy are among those aged 65 or over – many of whom are retirees. From 1997 to 2015 alone, males over 65 gained an average of 59.4% more time, and females 68.2%, which is a lot of time – all of which needs to be paid for.
At the same time, the structure of our population is also changing – the proportion of Australians aged 65 and over also growing, with massive implications for the amount of savings they need, but also for the government, which supports those with insufficient savings via the Age Pension and other benefits.
What do Australians really expect to have in retirement?
According to the Report from National Seniors Australia what mattered most to people in retirement was having regular, consistent income to meet their essential needs. The challenge however, is that even those who understand that they are likely to live longer said that they were ill prepared financially for a longer life. In fact, 22% said they ‘hadn’t planned at all’ for an increasing lifespan, and only 50% had made any plans at all.
The problem is unfortunately exacerbated by the fact the majority of Australians are already woefully under-prepared financially for retirement. According to the Association of Superannuation Funds (ASFA), to live comfortably in retirement an Australian individual needs at least $545,000 and a couple needs $600,000. Yet the median asset balance of the 5,700 surveyed in the National Seniors Report was $300,000, far less than they are likely to require.
Choosing your retirement age? Most Australians don’t have that luxury.
When the ABS asked Australians when they intended to retire, 40% did not know when they would retire, and of those that did, half intended to retire between the ages of 65 and 69 years, and 20% over the age of 70.
What is interesting about these statistics is the reasons given for choosing a certain retirement date – and it wasn’t really about age. It was all about financial security. When asked to give the main factor influencing the decision about when to retire, by far the largest number, over 40% said that financial security was the number one reason. Less than 5% said that the desire to have more personal or leisure time was a factor.
The bottom line is that Australians understand they will likely live longer, are concerned about how they will fund their longer life but are no good at planning for it. And even more concerning, many of the older Australians that the National Seniors Report spoke to had not made allowances for the rising costs of old age, including higher medical expenses and the cost of a residential care facility.
Changes to super have placed more roadblocks in way of retirement planning.
The changes to super introduced in July 2017 make it more difficult than before to contribute large lump sums to super in order to take advantage of the tax benefits on offer.
There is now a limit on the amount that can be contributed to super in each financial year before extra tax is payable. And for those who do not have $1.6 million in super (after which they can no longer contribute more to super at all), there is now a concessional cap of $25,000 and a non-concessional cap of $100,000 per annum, after which the tax benefit disappears.
So what other options are there?
Investment bonds are a tax-effective, flexible and low cost investment strategy
An investment bond is a tax effective structure. Like superannuation, tax is paid within the investment bond rather than personally by the investor. The maximum tax paid on the earnings and capital gains within an investment bond is 30%, although franking credits and tax deductions can reduce this effective tax rate. This, along with the following benefits, make investment bonds an attractive investment option, particularly for high income earners.
1. Tax free after 10 years
If an investment bond is held for 10 years, no personal tax is payable by the investor. However, if the investment is redeemed within the first 10 years, the investor will pay tax on the assessable portion of growth as shown below.
Tax payable on returns from investment bonds
Taxable portion (of growth redrawn)
Within the first 8 years
In year 9
In year 10
After 10 years
Investment bonds could be established to mature at different milestones in retirement – five years in, seven years in, 10 years in…this way, your client can be sure of regular sums at regular intervals to supplement their superannuation and fund a comfortable retirement and allow for changing needs at different life stages
2. No limit on contributions
To contribute to superannuation an investor needs to meet eligibility rules. This requires the investor to be under age 65 or, if aged 65 to 75, they need to meet a work test. If eligible, contribution caps will limit the amount of contributions that can be made to superannuation.
There is no limit on the amount that can be invested to establish an investment bond, and investors can make subsequent investments up to maximum of 125% of the previous year’s contribution without restarting the ten-year period. Investors can choose to start a new investment bond if higher amounts are to be subsequently invested – or if they would like to target specific maturity dates throughout their retirement.
Investment bonds can provide a tax effective means of investing and avoid excess contributions tax that may otherwise apply in the case of superannuation contributions post 1 July 2017.
<strong">3. No access restrictions
Unlike superannuation investments, investment bonds are not subject to preservation. This means that investors can access savings before age 55; this makes investment bonds an ideal vehicle if a client is looking to fund an early retirement and doesn’t want to incur the penalties associated with early access to superannuation.
4. Tax free for beneficiaries
Investment bonds provide investors with the freedom to nominate anyone as a beneficiary in the event of their death. Beneficiaries are not limited to ‘dependants’, as is typically required for superannuation investments and importantly, receive the proceeds of an investment bond tax free, regardless of the length of time it has been invested – no need to wait for the 10 years to be up.
When compared to other investment vehicles, investment bonds are an ideal means through which clients can save in a tax effective manner to supplement their superannuation.
Australians are living longer than ever before, but unfortunately their retirement savings are not growing at the same pace as their life expectancy. And given that most Australians are already under-prepared financially for retirement, there’s no question that the sooner they focus on building up long-term savings, the better. Super is a great option of course, but for some Australians, those affected by the recent changes for example, or others who are looking for a tax-effective strategy which is flexible and allows for access to funds, investment bonds can be a great option.
If you would like to speak to one of our investment bond specialists, or for more information, visit http://centuria.com.au/investment-bonds